In this episode of The McKinsey Podcast, Kate Smaje and Rodney Zemmel—global leaders of McKinsey Digital—talk with McKinsey Global Publishing’s about digital transformation: what it really means, how to deliver on it, and why it should remain front and center on the CEO agenda. Plus, stay tuned for Kate’s and Rodney’s quick takes on trends to watch.

After, in an Author Talks excerpt, Amy Webb, futurist and author of The Genesis Machine: Our Quest to Rewrite Life in the Age of Synthetic Biology (Hachette Book Group, February 2022), describes how synthetic biology could open the door to “bespoke children,” significantly longer life spans, and subterranean societies.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

Digital transformations are a long game

Lucia Rahilly: The phrase “digital transformation” has been part of our business lexicon for many years now. And at this juncture, most companies have, presumably, invested a relatively substantial volume of resources in digital and tech. Have leaders made any meaningful progress in reinventing themselves digitally? Or is successful digital transformation still elusive?

Rodney Zemmel: It’s become fashionable to say that many digital transformations fail, that it’s hard to get value out of them, and so on. I think that’s created an impression that digital transformation is elusive. The reality is, most big companies have undertaken a digital transformation, and most big companies get some value from that digital transformation.

The point of digital transformation isn’t to become digital. It’s actually to generate value for the business. And having a clear, integrated, top-down road map of where that value is is one of the biggest gaps between companies that get the full value and companies that get something that is just a shadow approximation of the full value.

Kate Smaje: Another important part of a successful digital transformation is how you define what “good” really looks like here. Because there isn’t a point in time when digital transformation is done. It’s much more about, “How am I building a real muscle for the organization to continue getting better and better as I go on?”

Where leaders go wrong

Lucia Rahilly: The two of you are talking to leaders on this topic every day. In your work helping leaders reinvent themselves digitally, what are some concrete examples of the kinds of challenges you see?

Rodney Zemmel: A common failure mode, or an insufficient success mode, is a chief executive saying, “We’re going to go digital,” and then making public statements about digital strategy. Then every person on their leadership team creates their own digital road map. What you end up with, six months or a year later, are many digital pilot projects across the organization.

Instead, the chief executive needs to focus on getting the full leadership team to be able to talk from the same page and have the same set of priorities, and then focus on having a talent and capability road map that is as detailed as their technology road map—and getting that team to move as one against a clear set of technology priorities and people priorities.

Kate Smaje: The key here is being able to articulate how value is created in a company. And the challenge that lots of companies find is they don’t have a consistent and aligned way of either identifying or measuring that value, and therefore it becomes harder to go after it.

What you typically see 12 months, 18 months, or two years into many transformations is this notion of, “I don’t feel I’m getting as much as I should be.” The root cause of that is often a lack of alignment on where and how that value is going to be created.

How to get started

Lucia Rahilly: Let’s go a little deeper into the how—for example, how leaders assess where transformative value is possible within an organization. What do you suggest there?

Rodney Zemmel: There are three rules of thumb that seem to be evolving. First is that companies that get the most value from this actually spend a lot of effort thinking about, “What are the new digital businesses to launch? How can we create new value with new products and new customers versus transforming the existing business processes?” There’s sort of a duality—you should spend as much focus on new digital business building as you do on transforming the current business.

Rule of thumb number two is, you’ve got to focus on things that are big enough. And maybe that’s obvious, but it sometimes surprises us how many people will call something a digital transformation, and you add up the total economic impact, and it’s less than, say, 15 or 20 percent of the company’s overall EBITDA. If you’re not targeting at least 15 or 20 percent, in our mind it’s hard to call that a transformation and to sustain the level of organizational focus around it.

And then the third rule of thumb is, it’s best to start with a concentration in a particular area rather than sprinkle a little bit of digital or a handful of analytics use cases broadly across the organization. Pick one area of the business and really focus on building some momentum there first and then on growing from there on out. We think those three rules of thumb have emerged from the companies that have been more successful relative to others.